Building National Competitiveness in Southeast Europe National Competitiveness Report for Romania
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BUILDING NATIONAL COMPETITIVENESS IN SOUTHEAST EUROPE NATIONAL COMPETITIVENESS REPORT FOR ROMANIA FINAL REPORT Prepared for: U.S. Agency for International Development Compiled by: J. E. Austin Associates, Inc. Sponsored by: USAID E&E Bureau Contract No. PCE-1-00-98-00016-00 Task Order No. GBTI-008 Nathan-MSI SEGIR GBTI Consortium December 2001 Romania National Competitiveness Report TABLE OF CONTENTS Executive Summary Chapter 1 - lntroduction Chapter 2 - Recent Economic Developments Chapter 3 - National Platform for Competitiveness 3.1 Political Stability 3.2 Macro- and Microeconomic Environment 3.3 Legal and Institutional Environment Chapter 4 - Competitiveness Benchmarking 4.1 Definition 4.2 Objectives of the Benchmarking Report 4.3 Methodology 4.4 Uses and Limitations of the Study 4.5 Overview of Competitiveness Categories 4.6 Summary Chapter 5 - Trade and Investment Competitiveness 5.1 Linkages between Trade, Investment, and Growth 5.2 Approach 5.3 Current Trade 5.4 Global Competitiveness of Romanian Exports 5.5 Current FDI Flows 5.6 Competitiveness of the Romanian FDI Environment 5.7 Opportunities Chapter 6 - Industry and Firm-level Competitiveness 6. I lntroduction 6.2 Apparel 6.3 Information Technology 6.4 Tourism 6.5 Wood and Furniture Chapter 7 - Competitiveness Constraints in Romania 7.1 General Competitiveness Constraints 7.2 Industry-specific Competitiveness Constraints Chapter 8 - Analysis of Private-Public Dialogue in Romania 8.1 lntroduction 8.2 Overview of Legislation Change Process in Romania 8.3 Recent Experiences Chapter 9 - Recommendations ANNEX 1: Competitiveness Benchmarks ANNEX 2: Competitiveness Bibliography J.E. Austin Associates, hc. i Romania National Competitiveness Report EXECUTIVE SUMMARY Introduction With the objective of supporting the competitiveness building process in Southeast Europe, the Europe and Eurasia Bureau of USAlD has asked J. E. Austin Associates, Inc. (JAA) to carry out a Competitiveness Assessment to instigate a National Competitiveness Building Process in Romania, Croatia, Macedonia, and Albania. 'This brief summary recapitulates the main findings of JAA's work in Romania under USAlD Task Order No. GBTI-008 of the Nathan-MSI SEGlR GBTl PCE-I-00-98-00016-00 contract. Economic Overview Romania's progress in stabilization and reform since 1989 has been limited compared to many transitional economies in Europe. The country's foreign debt burden, the impact of the UN trade embargo on Yugoslavia between 1992-95, and most important, its adoption of stop-and-go macroeconomic policies have all contributed to low economic growth, high and variable rates of inflation, and periods of severe balance of payments pressures. In addition, the country's politics has experienced considerable chaos since 1989, and there has been a marked failure to create a consensus within the government and among various member parties on how to implement economic reform. This has contributed to Romania's sluggish economic performance over the past decade. Romania suffered from negative economic growth rates in 1997 and 1998. Inflation has been historically high and fluctuating and Romania's current account deficit has also been a severe problem. Faced with the threat of imminent crisis, the government took decisive measures in early 1999 to stabilize the economy. 'These measures consisted of strong fiscal correction, introduction of tight monetary and income policies, and strong measures to restructure the banking sector. These policies have succeeded in reducing the current account deficit substantially and the fiscal deficit was also brought down in 1999. However, the market outlook remained cautious with continuing economic recession, and a negative GDP growth rate of -3.2% in 1999. In 2000, Romania witnessed a slight economic recovery driven by growth in exports and investment. For the first time after three consecutive years of decline (1997-99)', GDP grew at a positive rate of 1.6%. Exports increased dramatically by 25%, mainly reflecting stronger foreign demand, and the impact of a sharply depreciated local currency. Gross domestic investment also increased by 5.5%. The fiscal deficit was slightly higher than in 1999, and there was also a pick-up of 17% in imports, a result of stronger demand for immediate and capital goods as well as higher fuel prices2. In addition, inflation had not yet been brought under control, and the average rate for the year remained high at 45.6%3. - - - IMF Staff Country Report No. 001159, December 2000: GDP contracted by 6.1% in 1997,5.4% in 1998, and 3.2% in 1999. * EIU Ibid. - - - - - J.E. Austin Associates, Inc. E- 1 Romania National Competitiveness Report Registered ~~nemploymentwas estimated to have been around 11% since 19984. The Romanian labor force is highly educated; but the country's declining birth rate and aging population is expected to put a further strain on its funding of pensions, social security, and medical systems. Labor regulations are mostly in compliance with international practice, and are not viewed as impediments to doing business in Romania. However, employer social contributions are considered high, which appears not only to encourage payment evasion among employers, but also to discourage employment generation5. Overall, significant changes have been made in Romania's laws and legal institutions to improve its investment framework, and to unify the system with international and European standards. However, Romania has faced considerable problems at the implementation level. Examples include persistent corruption, restrictive bureaucracy in land/construction pem~itprocedures, cumbersome customs procedures at the borders, poorly trained customs staff, and bureaucratic hurdles in the approval procedures for special types of investment. There is also much room for improvement in the judicial system, including the acceleration of judicial procedures; and better pay, training, and status for err~ployeesof the judicial system in order to attract and retain highly qualified staff. Competitiveness Benchmarking JAA has carried out a competitiveness benchmarking exercise to reflect how Romania ranks relative to the other countries in Southeast ~urope~,the EU accession countries, the EU countries themselves and all countries of the world for which data was available in the areas that are generally understood to be closely correlated to competitiveness. Informed by competitiveness theory and by the methodologies used by the World Economic Forum, Harvard University and the Institute for Management Development along with its own work in 100 countries over 15 years, JAA has selected 40 indicators related to eight competitiveness-related categories: economic performance, exports, investment, financial sector, human resources, science/technology, infrastructure and government policy. Although it is a larger country that is somewhat disconnected from the rest of the Balkans and with a larger population, Romania shares some of the common institutional problems of the Southeast Europe region. While the country ranks better in the human resources, the infrastructure, and the investment competitiveness indicators, it does poorly in economic performance, financial sector, and policy environment rankings. The country has a problematic financial sector and a poor record of economic growth. However, the export growth of Romania has shown some recovery over the last couple of years. Other problems are related to instability and conflict in Southeast Europe, Romania's poor domestic financial sector and a policy environment hampering economic growth. In particular, the slow pace of reforms has further limited Romania's competitiveness. Also typically for Southeast Europe, Romania's financial sector is underdeveloped. However, relatively large foreign investments have shown that Romania's opportunity lies with its EIU, CMF, PriceWaterhouseCoopers Business Guide to Romania, PriceWaterhouseCoopers, 1999: Employer social contributions are considered high, accounting for 45-53% of gross salary, including 30% in social security (but up to 40% in certain industries), 7% to the health fund, 5% to the unemployment fund, and 2% to the education fund. Croatia, Bulgaria, Macedonia, and Albania J.E. Austin Associates, Inc. E-2 Romania National Competitiveness Report comparably large market, human resources, and the continued development of a viable export sector. Even though the Government of Romania recognizes the importance of the information technology sector, computer availability is very low in Romania. Wh a well-educated workforce and a sound privatization program, the country has managed to attract relatively large amounts of foreign investment in comparison to the rest of Southeast European countries, probably linked to the privatization. Attracted FDI will prove beneficial in the years to come, but did not have an immediate impact to counterbalance the recent recession that hit Romania. The key issues that Romania faces are microeconomic liberalization, which will open 1.1~ business opportunities, and macroeconomic stabilization, which will lead to hardening of budget constraints. Romania needs to go ahead with its introduction of reforms that are necessary for a successful transition but were delayed due to the slow progress of the public sector, and move quickly to address the limitations revealed in the indicators below. Trade and Investment Competitiveness The trade figures for Romania over the 1994-1999 period indicate an increase in trade deficit from 1994 to 1998